How to Get a No-Bid Contract for Russian Choppers

How did a company best known for its communications gear manage to get a $322 million, no-bid contract to supply the Iraqi military with Russian helicopters? Not even the Pentagon can come up with a convincing explanation.

Yesterday, I spent an hour on the phone with two Defense Department officials who tried to explain to me why ARINC, a Maryland subsidiary of the Carlyle Group, managed to become the United States’ largest broker for Russian military aircraft. They were polite and patient, but the only reason they gave me was that ARINC had some sort of one-of-a-kind, "special relationship" with Russia’s copter-supplier.

E-mails obtained by Danger Room through the Freedom of Information Act tell a very different story, however.

Let’s review:

For the past year, I’ve followed the U.S. government’s involvement in buying Russian-made Mi-17 helicopters for Iraq and Afghanistan to support the global War on Terror (or whatever it’s called now). Those purchases have included no-bid and limited-competition contracts worth over $500 million, all provided to one company, ARINC, despite the company’s modest track record in the field.

ARINC is not typically the provider of aircraft, let alone Russian aircraft, though it did have one foot in the Russian helicopter world — it was on contract in Iraq maintaining some of Iraq’s older Mi-17s (several other American companies perform similar services). That’s a long way away from buying, modifying and delivering a fleet of new aircraft.

Yet ARINC managed to convince the Defense Department — or more specifically, the Army’s Threat Systems Management Office (TSMO) — to give them hundreds of millions in exclusive contracts. The key, according to e-mails released this week, was ARINC’s assertion that it was the only company capable of buying the helicopters. It’s a claim that strains credulity, given the number of companies and factories involved in this field (and the fact you can practically order one online). More troubling, Army contracting officials then worked with ARINC officials to tailor the paperwork to back up this claim and justify a sole-source contract.

"We have gone to great lengths and effort to get these quotes and establish these relationships through legitimate and proper means," an ARINC employee wrote to Army officials in the summer of 2007, many months before the contract was awarded. "They have, once again, reconfirmed that the ARINC Team is the only team has formal approval and formal quotes for these aircraft."

But, according to e-mail traffic, the letter ARINC actually obtained from the Russian MIL Helicopter Plantto support this claim fell short. "Seems to me this memo now says 3 companies are supported," one Army contracting representative wrote, after reviewing a letter from MIL provided by ARINC. "See how we, the Govt, can communicate with MIL to get what we need."

"We need MIL to tell us that ARINC is the only distributor for the MI-17s," another contracting official wrote.

In yesterday’s conversation, the phrase "special relationship" was repeated several times to explain why ARINC was selected. But earlier this week, when I asked for a copy of this magical letter from the Army FOIA office (since many of the other documents had been released to me) I was told that in fact this letter, in the end, was not the basis of the sole-source, so the letter wouldn’t be released.

It must be a very special relationship indeed. And a very special letter.

The e-mail traffic about this letter is shocking for what it demonstrates: The U.S. Army tried to solicit a specific statement from a Russian company, rather than verifying that ARINC — let alone the Russian firm — really was the only authorized supplier. The Army then created an "urgent requirement" (PDF) claiming that the Mi-17s were needed immediately and that only ARINC could supply them. (The urgency is particularly mysterious, because the Pentagon notified Congress of the possible Mi-17 sale in 2006).

I see two quite serious problems here. First, MIL is a design bureau, and only a partial owner (through its parent company) in the factory that builds the helicopters. So, we’re talking about an exclusive relationship with a company that doesn’t really own the helicopters. The second problem is that the urgent requirement was generated many months after the Army was already in talks with ARINC.

One e-mail from ARINC written to Army officials over the summer of 2007 says the ARINC "proposal addresses the requirements you recently identified to us." The ARINC official, in the e-mail, also helpfully tells the Army about its acquisition by the Carlyle Group, which it promised would be "a tremendous boost for ARINC since it brings to us all the resources and clout of a huge conglomerate corporation…."

In fact, ARINC, according to e-mails it sent, was well aware that other companies were getting price quotes from the Russians. "Other agencies are attempting to get verbal quotes (not formal written quotes) under the guise of a commercial buy, even though the intended purpose is not commercial," an ARINC official wrote to the Army. "Our team is the only recognized team that is being honored as a military related purchase and that will have reach back into the factories and design bureau for modification and engineering support."

The two fine gentlemen on the phone with me yesterday wanted to assure me that everything was a-OK with this deal (and believe me, my heart goes out to them for this thankless task), but they clearly did not understand how the Russian aerospace industry works.

The Russians do not create exclusive agreements with American companies; they sell to whoever comes to them with a contract and the proven ability to pay. The officials involved in this sale should have realized one simple thing: By honoring an "exclusive agreement" rather than seeking multiple quotes, they allowed ARINC and the Russians to dictate the terms, which explains the the sky-high sticker price for the helos.

For those with experience buying and selling Russians weapons, there isn’t much surprising about what ARINC did — it’s a common, albeit frowned-upon, practice for foreign companies to solicit letters from Russian and East European officials stating the company is the only authorized supplier. (In fact, I’ve seen one such letter from a Ukrainian weapons agency, as well as a subsequent letter given to another company denying that such an exclusive arrangement exists.) If someone wants to front me the money, believe me, I’ll incorporate myself in Pottsylvania, call myself Natasha Fatale, and get a letter from Boris Badenov saying I’m the exclusive American supplier for MiG.

Not surprisingly, a spokesperson for ARINC declined to comment on any aspect of this sale (I wouldn’t either; I’d be planning my dream vacation to the south of France). The Pentagon, for its part, says that the contract was properly awarded.

And, of course, the punchline to this long, involved joke of a contracting process is that ARINC’s Russian choppers haven’t been delivered, yet. In my conversation yesterday, I was told that -— as a result of changes to the modification work — the initial aircraft have been delayed 10 months, and there is likely to be a 5-10 percent cost increase above and beyond the $322 million contract.

Oh, and the Russians haven’t signed the end-user certificate yet, which allows the the helicopters to leave the country and go to the UAE, where the modification work will be done by another Russian company. Did I mention the Russians have already been paid?

So, when will ARINC — the super special exclusive, authorized supplier of these helicopters — finally bring them to Iraq? As I wrote earlier this week, once paid, the Russians have no particular incentive to deliver on time, or at all. So, with all due respect to the gentlemen I spoke with yesterday, I’m guessing, these helicopters aren’t showing up anytime soon. I hope I’m wrong.

In the meantime, here’s a bit of free advice for the Pentagon about buying Russian weapons: The first guy that shows up at your door waiving an exclusive agreement is also the first guy you should boot out of your office. The Russians don’t really give exclusive agreements to American companies, they sell helicopters. Sorry, you’ve been had, not just by the Russians, but by the Americans, too.

And here’s a tip for ARINC on Russian business culture: The same guys who gave you that nifty piece of paper claiming you were the one and only company authorized to buy the helicopters are the same guys that you have to trust to actually deliver the helicopters after you’ve paid for them. And no, drinking shots of Stoli with the Russians after you sign the paperwork doesn’t really make you lifelong brothers. Next time pay on delivery.

[Endnote: Writing about this contract makes my head hurt, so I’m taking a little break. Also, I’m working on a longer article about Mi-17s that I need to finish. Later this month, however, I’ll be back to discuss TSMO, the obscure little Army organization behind these curious contracts. And before that, I may return to another favorite topic, Russian tanks! And at some point, I’m also going to talk again about the big bear in the room — the fact that all these Russian entities are tied to Rosoboronexport, which is under U.S. sanctions. And I promise to update with any news — good or bad -— about this helo contract.]